2 Trades: MSFT and AAPL Straddles

Trade:
Buy 6 MSFT Strike 30 May Calls and Puts.
Entire trade at 2.25/contract

Buy 1 AAPL Strike 240 May Calls and Puts.
Entire trade at 21.30/contract

Analysis:
Both these tech giants are announcing earnings on 4/21 and 4/22. The Average implied volatilities are dwindling 26% for MSFT and 31% for AAPL. This is much lower than the average for both companies and the reason may be the steady bull run both companies have enjoyed since last earning season.

However, already implied volatility is starting to creep back into the market as earnings approach - investors are protecting themselves against a possible reversal in the trend post-earnings.

Expecting to see the age-old phenomenon of rising implied volatility in pre-earnings weeks, I have traded the above strangles. My worry is that theta is somewhat high for May options, but June contracts were too expensive and did not present the desired vega values. Additionally, the historical volatilities are lower than the implied, suggesting the IV could fall lower or stay the same. Theta deterioration and a lack of increase in volatility could hurt me.

Profit/Loss Expectations and Trade Management:
If implied volatility rises a mere 5%, I will make ~$300 on both trades (which is approximately 22% on MSFT and 14% on AAPL). If this happens, I will exit the trade aroudn 4/19 in order to protect myself from falling implied volatility post-earnings.

Also, depending on the time frame, if AAPL or MSFT move ~6% in either direction, I can expect to make a profit (the probability of this is ~45% for both trades). If there is a significant breakout in either direction, I will sell the other leg and retain profits on the winning side.

The worst case scenario would be that both stocks move right to the strikes I traded and settle there along with falling implied volatility. If this happens, I will exit the trade a couple days after earnings announcement.

-Wown
Stockjockz.blogspot.com